QIAGEN N.V. Annual Report 2000

Transcription

1 QIAGEN N.V. Annual Report 2000

2 Contents 2 Report of the Supervisory Board 6 QIAGEN Keys to the Life Science Revolution 4 Letter from the Management Board 16 Contents Financial Data QIAGEN is the world s leading provider of innovative technologies for separating, purifying, and handling DNA and RNA the genetic blueprints of life. Since 1984, QIAGEN has successfully developed, produced, and marketed an ever-increasing range of proprietary products for academic, industrial, and clinical research. The new millennium began with the completion of a tremendous scientific undertaking the sequencing of the entire human genome. However this by no means represents the finish point. The task ahead is to identify and characterize each of the estimated 30,000 genes encoded within the human genome. Such analysis will eventually lead to an increased range of therapeutic strategies, and is expected to shift disease management from a diagnosis and treatment approach to one of prediction and prevention. Genome sequencing of clinically important bacteria, parasites, and fungi, as well as of plants and animals will similarly lead to new infectious disease, agricultural, and veterinary management. We are entering a life science revolution. molecular diagnostics, and genetic vaccination and gene therapy. These markets share a crucial prerequisite highly pure DNA and RNA. QIAGEN is uniquely positioned to take full advantage of the wealth of commercial opportunities presented by the life science revolution. Already a leader in the research market, in 2000 QIAGEN strengthened its position in genomics, molecular diagnostics, and gene therapy markets through innovative new products, new automated laboratory processes, strategic alliances with commercial players, and the acquisition of Operon Technologies, Inc. Our tradition of innovation, quality, and service is generating exciting new opportunities, and will continue to be the key factor for growth and success of the Company s core business the separation, purification, and handling of nucleic acids. This life science revolution will fuel commercial markets such as DNA sequencing, genomics, microarray analysis for gene and drug discovery, DNA- and RNA-based

3 Financial Highlights Financial Highlights Net Sales 220,000 5-Year CAGR: 42.7% 210, , , ,000 Net Income 170, ,000 27,000 5-Year CAGR: 63.5% 150,000 26, ,000 25,000 24,000 23,000 22,000 in US$ thousands 130, , , , ,000 90,000 20,000 80,000 19,000 70,000 18,000 60,000 17,000 50,000 16,000 40,000 Diluted Earnings per Share 15,000 30, Year CAGR: 55.2% in US$ thousands 14,000 13,000 20,000 10,000 12, , , , , , , ,000 US$ per share ,000 3, , , * * 2000 * Excluding the effect of purchased in-process research and development related to the acquisition of Rapigene, Inc. Excluding the effect of one-time charges related to the acquisition of Operon Technologies, Inc.

4 Report of the Supervisory Board QIAGEN Supervisory Board with QIAGEN Management Board From left to right, standing: Dr. H. Hornef; Mr. Peer M. Schatz; Dr. Metin Colpan; Prof. Dr. jur. Carsten P. Claussen (Special Advisor and Honorary Chairman); Mr. Erik Hornnaess; Prof. Dr. Manfred Karobath. 2 From left to right, sitting: Dr. Franz A. Wirtz; Prof. Dr. Detlev H. Riesner; Mr. Jochen Walter. Dear Fellow Shareholders, The Supervisory Board exercised supervision over the Management Board s policies and business conduct throughout the financial year. Acting in the best interests of the Company and its business, the Supervisory Board monitored the Company s activities, including its strategic, economic, and market developments, R&D investments, acquisitions and alliances, and human resources management. Information on the Company s activities was communicated by the Management Board to the Supervisory Board through regular meetings and business reports. The Audit and Compensation Committees, which are composed of members of the Supervisory Board, have monitored various Company issues according to the Netherlands Committee on Corporate Governance, and have fulfilled their legal purposes. The Supervisory Board has no major changes to report regarding the recommendations of the Netherlands Committee on Corporate Governance described in the Company s 1997 Annual Report. QIAGEN N.V. is a limited liability company incorporated under the laws of the Netherlands. All Company operations are carried out according to Dutch Corporation Law, U.S. Federal Securities Law and Regulations, and the laws of the German capital market, in particular the Börsengesetz and the Wertpapierhandelsgesetz. The common shares of the Company are registered and traded in the United States on the Nasdaq National Market and in Germany on the Neuer Markt division of the Frankfurt Stock Exchange. The majority of the Company s shares are believed to be held by shareholders in the United States and in Europe, particularly Germany.

5 Report of the Supervisory Board The Supervisory Board congratulates the Management Board on a successful It was certainly an exciting year for QIAGEN. The Company practices non-distribution of net income, as is common among relatively young, fast-growing companies with significant future growth potential in rapidly growing fields. This policy benefits shareholders by increasing share value, and we believe it to be in line with shareholders taxation preferences. 3 In this Annual Report the financial statements for the year 2000 are presented, as prepared by the Management Board. These statements have been audited by Arthur Andersen LLP (Independent Public Accountants) and examined and approved by the Supervisory Board. We recommend that shareholders adopt these financial statements, including allocation of profits to retained earnings, at the Annual General Meeting. The term of office of the members of the Supervisory Board expires as of the close of the Annual General Meeting of shareholders of QIAGEN N.V. to be held on June 13, Mr. E. Hornnaess, Prof. Dr. D. Riesner, Mr. J. Walter, Dr. F. Wirtz, Prof. Dr. M. Karobath, and Dr. H. Hornef will stand for re-election. Prof. Dr. C. P. Claussen has agreed to continue to serve as Special Advisor and Honorary Chairman. The Supervisory Board proposes that the Managing Directors Dr. Metin Colpan, Chief Executive Officer, and Mr. Peer M. Schatz, Chief Financial Officer, be re-elected as members of the Management Board at the Annual General Meeting on June 13, Hilden, Germany, April 2001 Prof. Dr. Detlev Riesner Chairman of the Supervisory Board

6 4 Letter from the Management Board

7 Letter from the Management Board To Our Shareholders, We are very pleased to report that 2000 was another successful year for QIAGEN, both for our customers and our shareholders. We introduced over 20 new products and continued our 15-year growth momentum, with net sales increasing 29% to $204.0 million. Consolidated net income grew by 45% to $20.1 million over Diluted earnings per share increased 40% to $0.14 in QIAGEN s growth is based on the systematic development of innovative new products and services, backed up by our powerful sales, service, and support network. Our continually expanding technology platform, the excellence of our R&D team, and the commitment of our dynamic and enthusiastic workforce are the cornerstones of our success. In 2000, QIAGEN launched over 20 new products and introduced the fourth generation of our BioRobot series of workstations. We also acquired Operon Technologies, Inc., allowing us to leverage our strengths in the rapidly growing genomics field. In addition, 2000 saw the opening of our ninth sales and marketing subsidiary, in Milan, Italy, which will further drive the Company s growth in the European market. 5 QIAGEN believes that the completion of the sequencing of the entire human genome in 2000 heralds a life science revolution. This research is fueling commercial markets such as genomics, molecular diagnostics, drug discovery, and gene therapy markets we are actively entering as the leading supplier of nucleic acid separation, purification, and handling technologies. Our technology leadership and our focus on one of the largest segments of the life science industry have put QIAGEN in a unique and strong position, from which the future looks bright. Thank you for your interest in QIAGEN, and we look forward to reporting future successes. Dr. Metin Colpan Chief Executive Officer Mr. Peer M. Schatz Chief Financial Officer

8 QIAGEN Keys to the Life Science Revolution In 2000 a tremendous scientific undertaking the sequencing of the entire human genome was completed. The life science industry is now entering a new era, where the accelerating fields of genomics, molecular diagnostics, drug discovery, and gene therapy are creating new, innovative therapeutics and diagnostics based on genetic information. Genetic information is encoded by nucleic acids. QIAGEN s technologies give access to these nucleic acids, providing efficient methods for their separation, purification, and handling so that they can be analyzed. QIAGEN s products are therefore the keys to the life science revolution. 6 QIAGEN DNA/RNA Separation Purification Handling Cells Blood Bacteria 320 products over 400 applied for and issued patents 15 subsidiaries throughout the world Total RNA Viral RNA Poly A + mrna cdna Genomic DNA Tissue over 300 sales people Viral DNA Plasmid DNA Plants estimated 300,000 customers Cosmid DNA BAC/PAC DNA Others P1 DNA M13/Lambda DNA Samples Nucleic acid purification Genetic information/ nucleic acids Assay/ application

9 QIAGEN Keys to the Life Science Revolution Life science research is increasing our understanding of disease and radically changing the way diseases are diagnosed and drugs are developed and manufactured. This research could provide drugs for diseases where no cure and/or only limited treatment is currently available, including cancer, Alzheimer s disease, and infectious diseases such as HIV. It could also provide personalized therapies designed for individual patients as well as more effective management of infectious diseases. In addition, an integrated understanding of gene function and protein interactions will allow new and exciting applications and technologies based on DNA and RNA, the nucleic acids fundamental to life. These developments are based on genetic information. The keys to unlock the power of genetic information are tools for the separation, purification, and handling of nucleic acids. Nucleic acid purification is therefore essential for the life science revolution, and indeed has become one of the largest market segments for life science-enabling technologies. The nucleic acid purification market is very large, but also very segmented. A broad array of technologies is therefore required for efficient isolation of different types of nucleic acids from different sample sources and for a wide range of applications. This segmentation amplifies the benefits of QIAGEN s broad technology portfolio, which is targeted to optimally address the market s needs. We are in the unique position of being able to combine and apply our technologies to create products that specifically address our customers needs, without having to model these needs around solutions available from only one technology. The company s strategic aim is to strengthen its core activities by developing new innovative products, integrating front-end preparation into automated systems, and providing exciting new technologies for the life science industry. 7 QIAGEN s core competence and business is the separation, purification, and handling of nucleic acids. The company has attained market leadership through an unmatched technology portfolio for these applications.

10 The Life Science Market 8 L ike the millions of water droplets that make up a cloud, a human chromosome is made up of millions of nucleotides, the basic units of DNA. The separation, purification, and handling of DNA and RNA are crucial for decoding their genetic information, and fundamental to life science research. QIAGEN offers a broad range of products to researchers around the world for both nucleic acid isolation and nucleic acid analysis.

11 The Life Science Market The life science research market represents the core of the life science sector, from which new market segments emerge. This market, which comprises academic and industrial customers, is strategically the most important market for QIAGEN. Here, new technologies, applications, New technologies routinely used in life science research, genomics, and molecular diagnostics require fast and efficient isolation of ultrapure nucleic acids using reliable technologies that can be integrated into automated laboratory processing and analysis systems. QIAGEN has and tools are developed and standardized developed the BioRobot series of molecular before they enter the more commercial markets of genomics, molecular diagnostics, and gene therapy. As the leading provider of solutions to the research market for nucleic acid separation, purification, and handling, QIAGEN stands in a strong position to take advantage of opportunities provided by these rapidly growing markets as well as newly emerging market segments. QIAGEN s success in this market is based on its broad technology platform from which new products are developed. The company works closely with scientists in the burgeoning life science industry to forge new market opportunities, and to develop and provide reliable and simple solutions for different applications as required by the people working at the forefront of this industry. In 2000, QIAGEN continued to expand its portfolio for the life science research market by launching over 20 innovative new products for nucleic acid purification, RNA stabilization, protein analysis, immunization, and DNA transfection. biology workstations to address this need, the fourth generation of which was launched in The BioRobot 8000 is designed for laboratories at the leading edge of genomics and other molecular biology fields that process large numbers of samples, and allows rapid, high-throughput, walk-away nucleic acid purification and routine liquid-handling in 384-well formats. A leading position as a brand-named company, the reputation for high-quality and innovative products and services, and flexibility in answering customers special needs form a solid base for new products to succeed, and will contribute to QIAGEN s strong growth in the life science research market. 9

12 The Genomics Market 10 G enomics research seeks to use genetic information to accelerate the discovery of new drugs, diagnostics, and agricultural products. With many genomes now sequenced, and many more in progress, the next challenge is to harvest the information within these genomes. As a supplier of products that enable genomics strategies, such as sequencing, SNP, and microarray analysis, QIAGEN will benefit from the rapid expansion of the genomics market.

13 The Genomics Market The genomics market is rapidly expanding as more and more genomes are sequenced. The push to identify each gene within each genome, elucidate gene function, and establish a link between particular DNA sequences and disease is creating enormous momentum in this market. To broaden our product offering in the genomics market, in 2000 QIAGEN acquired Operon Technologies, Inc., a technology leader in highthroughput production of synthetic nucleic acids (oligonucleotides), microarray products, and complete genes. Operon is the world s leading supplier of these products, and has built an industry-wide reputation for unsurpassed quality, reliable service, and competitive pricing. Synthetic nucleic acids have become one of the fastest growing areas of nucleic acid research and genomics, with a wide range of recently developed methods and tools for these markets relying on their availability, including DNA sequencing, microarrays, and SNP analysis. The combination of QIAGEN s technologies with select bioanalytical tools provides further market opportunities. During the last year, QIAGEN formed strategic alliances with several genomics companies, including Zeptosens AG and Luminex Corporation, to develop and commercialize new multi-analyte detection system technologies for applications in areas such as functional genomics, toxicology, and pharmacogenomics. QIAGEN Genomics, Inc. similarly formed several alliances in 2000 that strengthen its position as an enabling technology provider to the high-throughput SNP genotyping, gene-based drug discovery, and diagnostic development markets. Together these alliances add further breadth to the range of integrated solutions we offer to the genomics market, and increase the demand for QIAGEN s nucleic acid separation, purification, and handling technologies. As the genomics and drug discovery markets expand, there will be an increased need for efficient methods to prepare and analyze samples. By combining QIAGEN s core expertise with leading proprietary technologies and automated systems, we are creating integrated front-end technology platforms and opening a wide field of opportunities in the global genomics and drug discovery markets for QIAGEN s core business. 11

14 The Molecular Diagnostics Market 12 T he DNA polymerase isolated from the hot water bacterium Thermus aquaticus allowed the development of PCR. This technique revolutionized the life science industry and helped establish the molecular diagnostics industry, which uses nucleic acid-based techniques for disease diagnosis and predisposition testing. QIAGEN products for nucleic acid separation, purification, and handling are setting standards in this exciting market.

15 The Molecular Diagnostics Market With the recent launch of the first generation of DNA- and RNA-based diagnostic tests by the diagnostic industry, ready-to-run assays are now available for identification of genetic disorders, such as cystic fibrosis, and detection of pathogens, including viruses such as HIV and microorganisms such as the tuberculosis bacterium. New generations of nucleic acidbased molecular diagnostics could similarly be used for the detection or identification of disease genes as well as specific populations of cells, such as cancer cells. Commercial applications for this technology include infectious disease screening in blood banks, HLA typing for bone marrow and organ transplantation, genetic testing for predisposition to cancer and other common diseases, and genetic fingerprinting of patients as well as of animals and plants. QIAGEN believes that the molecular diagnostic market represents a significant, emerging market. The success of nucleic acid-based molecular diagnostics will depend on the availability of nucleic acids purified from a variety of different samples, for example blood and tissue, and on the ability of automation to handle hundreds of samples concurrently. in nucleic acid-based assays. In 2000, QIAGEN introduced the first in a series of planned products that allow stabilization of RNA within biological samples for reliable gene-expression and gene-profiling analysis. This new technology is especially important for the molecular diagnostics market. PreAnalytiX, a joint venture formed between QIAGEN and Becton, Dickinson and Company in 1999, has successfully developed its first integrated systems for collecting, stabilizing, and purifying nucleic acids for molecular diagnostics testing, which will be launched in early Through this venture, QIAGEN will be working towards providing clinical laboratories with the standardized, reliable procedures they need for sample processing. QIAGEN believes that applications for its RNA stabilization and nucleic acid purification products will expand significantly as the molecular diagnostics market adopts nucleic acid-based testing. 13 Immediate stabilization of nucleic acids in clinical samples is essential for meaningful results

16 The Gene Therapy Market 14 T here is a significant worldwide effort to develop a new generation of drugs based on nucleic acids. QIAGEN offers technologies for industrial-scale production of therapeutic-grade DNA for all stages of gene therapy projects, from clinical research to commercial production.

17 The Gene Therapy Market Following the sequencing of the entire human genome, the task ahead is to identify genes and gene mutations responsible for many common diseases and conditions, such as cancer, coronary artery disease, asthma, and obesity. Scientists believe that this research, as well as genome sequencing projects for other organisms, will lead to the development of a new generation of drugs based on the delivery of non-mutated genes to prevent or cure disease, therapeutics which mimic the biological functions of genes, and genetic vaccination. manufacturing of bulk quantity plasmid DNA under full cgmp conditions for use in clinical studies and for commercial production. The Company believes that the use in clinical testing of nucleic acids purified using its technologies and products will give it a strong position in the gene therapy market once genetic vaccination and gene therapy products become commercially available. 15 The development and commercialization of such drugs and vaccines will depend on the availability of large amounts of ultrapure nucleic acids of a quality suitable for therapeutic use in humans. QIAGEN offers contract manufacturing of plasmid DNA under non-cgmp conditions using its proprietary technology for ultrapure DNA purification and endotoxin removal. The purified plasmid DNA is suitable for all preclinical research, gene therapy research, and genetic vaccination research projects. cgmp-grade, endotoxin-free plasmid DNA is required by the FDA and other regulatory agencies for any application involving use in humans. Through its alliance with DSM Biologics and Valentis, QIAGEN provides contract

18 Contents Financial Data 17 Selected Consolidated Financial Data 18 Operating and Financial Review and Prospects 16 Overview Results of Operations Fiscal Year Ended December 31, 2000 compared to 1999 Fiscal Year Ended December 31, 1999 compared to 1998 Liquidity and Capital Resources New European Currency Business Factors Qualitative and Quantitative Disclosure about Market Risk 26 Consolidated Balance Sheets 28 Consolidated Statements of Income 29 Consolidated Statements of Shareholders' Equity and Comprehensive Income 30 Consolidated Statements of Cash Flows 32 Notes to Consolidated Financial Statements 51 Report of Independent Public Accountants 52 Balance Sheet 53 Statement of Income 53 Notes to Financial Statements 56 Auditors Report 57 Statutory Profit Appropriation 58 Executive Officers and Supervisory Directors 60 Market Information 63 Shareholder Information 63 SEC Form 20-F

19 SELECTED CONSOLIDATED FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) THE INFORMATION BELOW SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS (AND NOTES THEREON) AND "OPERATING AND FINANCIAL REVIEW AND PROSPECTS. Year Ended December 31, Consolidated Statement of Income Data: Net sales $ 204,031 $ 158,155 $ 120,804 $ 75,370 $ 54,652 Cost of sales 59,421 45,836 38,141 20,421 14,876 Gross profit 144, ,319 82,663 54,949 39,776 Operating Expenses: Research and development Sales and marketing General and administrative Acquisition costs In-process research and development 22,212 54,147 28,026 5,353 17,813 39,948 26,110 5,100 13,432 32,744 20,569 8,250 23,193 15,277 6,525 16,195 11, Total operating expenses 109,738 88,971 66,745 46,720 33,833 Income from operations 34,872 23,348 15,918 8,229 5,943 Other income, net 2,237 1,640 2,885 5,235 2,668 Income before provision for income taxes and minority interest 37,109 24,988 18,803 13,464 8,611 Provision for income taxes 16,967 10,950 5,489 4,157 3,331 Minority interest (31) Net income $ 20,106 $ 13,889 $ 13,166 $ 9,338 $ 5,280 Basic net income per common share 1 $ 0.14 $ 0.10 $ 0.09 $ 0.07 $ 0.04 Diluted net income per common share 1 $ 0.14 $ 0.10 $ 0.09 $ 0.07 $ 0.04 Weighted average number of common shares used to compute basic net income per common share 141, , , , ,229 Weighted average number of common shares used to compute diluted net income per common share 144, , , , , Consolidated Balance Sheet Data: Cash and cash equivalents $ 21,534 $ 12,393 $ 6,555 $ 4,451 $ 2,054 Working capital $ 97,940 $ 57,275 $ 46,235 $ 38,936 $ 35,349 Total assets $ 230,261 $ 154,331 $ 110,487 $ 82,025 $ 68,242 Total long-term liabilities, including current portion $ 25,221 $ 17,930 $ 8,227 $ 7,821 $ 8,799 Total shareholders' equity $ 164,385 $ 94,798 $ 74,156 $ 54,328 $ 48,638 1 Computed on the basis described for net income per common share in Note 4 of the "Notes to Consolidated Financial Statements.

20 Operating and Financial Review and Prospects THIS SECTION CONTAINS A NUMBER OF FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE BASED ON CURRENT MANAGEMENT EXPECTATIONS, AND ACTUAL RESULTS MAY DIFFER MATERIALLY. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM MANAGEMENT S EXPECTATIONS ARE THOSE DESCRIBED IN "BUSINESS FACTORS" BELOW. Overview 18 QIAGEN N.V. (the Company) believes that it is the world's leading provider of innovative enabling technologies and products for the separation and purification of nucleic acids based on the nature of its products and technologies and as supported by independent market studies. The Company was established to develop, manufacture, and market a broad portfolio of proprietary technologies and products, which meet the needs of the academic and industrial research markets. QIAGEN's products enable customers to reliably and rapidly produce high purity nucleic acids without using hazardous reagents or expensive equipment. On June 28, 2000, the Company acquired Operon Technologies, Inc. (Operon) of Alameda, California in a transaction that was accounted for as a pooling of interests. Operon manufactures and markets synthetic nucleic acids, DNA microarrays and synthetic genes. The synthetic nucleic acids are used in the analysis of nucleic acids purified from natural sources and will supplement the Company s current genomics and genetic analysis business. In December 1999, the Company completed the purchase of Rapigene, Inc. (renamed QIAGEN Genomics, Inc.), a leader in the area of innovative, enabling technologies and services for single nucleotide polymorphism (SNP) analysis. In 1999, the Company also made several strategic equity investments in and alliances with businesses whose technologies are complementary to the Company s business. Since 1996 the Company has had compound annual growth of approximately 37% in net sales and 147% in net income. Without the $5.4 million in acquisition costs related to Operon Technologies in 2000, compound annual growth of net income would have been approximately 159%. To date, the Company has funded its growth through internally generated funds, debt, the private sale of equity, and through proceeds from the sale of securities to the public. In 2000, before the $5.4 million charge related to the acquisition of Operon Technologies, Inc., the Company recorded $25.5 million of net income on $204 million of net sales. Results of Operations The following table sets forth certain income and expense items as a percentage of net sales for the periods indicated: Net sales 100.0% 100.0% 100.0% Cost of sales Gross profit Operating expenses: Research and development Sales and marketing General and administrative Acquisition costs In-process research and development Income from operations Other income Income before provision for income taxes and minority interest Provision for income taxes Minority interest Net income 9.9% 8.8% 11.0%

21 Excluding the acquisition costs of $5.4 million in 2000 related to Operon Technologies, the percentage for income from operations would have been 19.7% and net income would have been 12.5%. In 1999, without the $5.1 million charge for purchased in-process research and development, income from operations for that year would have been 17.9% and net income would have been 11.9%. Fiscal Year Ended December 31, 2000 compared to 1999 Net Sales. In 2000, net sales increased 29% (or $45.9 million) to $204.0 million compared to $158.2 million in All subsidiaries reported increased sales over the prior period. The majority of the Company s sales continue to be attributable to the Company s consumable products, which experienced strong growth worldwide during the year. Net sales in the United States increased 34% (or $29.6 million) to $117.2 million in 2000 from $87.6 million in Outside the United States, net sales increased 23% (or $16.3 million) to $86.9 million in 2000 from $70.6 million in Net sales within and outside of the United States increased principally due to increased unit sales of consumable and instrumentation products. The increase in sales within the U.S. was primarily due to increased sales at QIAGEN Inc. of approximately $22.6 million (31%) over the prior year. The increase in sales outside of the U.S. was led by increases at QIAGEN GmbH and QIAGEN K.K. of approximately $4.4 million (18%) and approximately 3.4 million (26%), respectively. In addition to obtaining new customer accounts, increases in consumable sales were also attributable to further leverage of the Company s sales force which, based on its size and focused presence, is increasingly able to identify and service customer needs. Additionally, the Company experienced very strong BioRobot sales and sales from the Operon products. While sales of consumable products continue to increase, the Company continues to expect, as disclosed in previous filings, a slower rate of sales growth for the range of products designed for large-scale plasmid DNA applications as their market matures. The Company continually introduces new products in order to extend the life of its existing product lines as well as to address new market opportunities. During 2000, the Company released over 20 new products including the BioRobot 8000, for fully automated nucleic acid purification and liquid handling, a system for purification of DNA in low elution volumes, a complete RNA protection and isolation system and a kit for ultrafast purification of ultrapure plasmid DNA. A significant portion of the Company s revenues is denominated in German marks. Compared to 1999, in 2000 the German mark, as measured by the average exchange rate for the period, depreciated against the U.S. dollar by 13.4%. If the same rates used for 1999 were applied to 2000, net sales in 2000 would have been higher and the related percentage growth would have been higher than the percentage calculated in reported net sales. See Currency Fluctuations. 19 Gross Profit. Gross profit increased 29% in 2000 to $144.6 million or 70.9% of net sales for the year ended 2000 compared to $112.3 million or 71.0% of net sales in The absolute dollar increase is attributable to the increase in net sales. Gross profit is reduced by increased sales of instrumentation products, such as the QIAGEN BioRobot, as they carry a lower gross margin than the Company s consumable products. The Company continues to develop additional instrumentation products that meet the needs of the molecular diagnostic and genomics markets and anticipates future increases in sales of instrumentation products. Research and Development. During 2000, research and development expense increased 25% to $22.2 million (10.9% of net sales), up from $17.8 million (11.3% of net sales) in During the first quarter of 1999, construction was completed on a new research and development facility, which was further expanded as of January 2000 and, as a result, operating costs related to the facility were higher in Additionally, QIAGEN Genomics, Inc., which was purchased on December 31, 1999, incurred $2.6 million in research and development costs in fiscal The increase in research and development expenses over the prior year are also due to the increased personnel costs related to hiring of new research and development personnel. At December 31, 2000, the Company employed 230 research and development personnel. The increase in research and development personnel, the expansion of the German research facility along with the new U.S. facility under construction demonstrates the Company s strong commitment to expanding research and development activities. The Company remains committed to these research and development efforts and anticipates that research and development expenses will continue to increase.

22 Sales and Marketing. Sales and marketing expenses increased 36% in 2000 to $54.1 million (26.5% of net sales) from $39.9 million (25.3% of net sales) in The increase in sales and marketing expenses is primarily attributable to increases in costs associated with marketing materials, such as publications and promotional items, and personnel. During 2000, the Company increased its sales force by approximately 30%. Sales and marketing expenses attributed to the Company s new subsidiaries QIAGEN Genomics, Inc. and QIAGEN SpA totaled $1.1 million for the year ended December 31, The Company anticipates that selling and marketing costs will continue to increase along with continued growth in sales of the Company s products. General and Administrative. General and administrative costs increased 7% in 2000 to $28.0 million (13.7% of net sales) from $26.1 million (16.5% of net sales) in The absolute dollar increase is primarily attributable to the general and administrative costs at the Company s five new subsidiaries. Further, this increase represents increased costs required to support the Company s administrative infrastructure that is growing to accommodate the Company s continued growth. The decrease in general and administrative costs as a percent of sales is primarily due to economies of scale. 20 Acquisition Costs. On June 28, 2000, the Company acquired Operon Technologies, Inc. in Alameda, California. In connection with the acquisition, which was accounted for as a pooling of interests, the Company incurred costs of $5.4 million. These costs include approximately $3.9 million of finders fees for the investment banker chosen by the shareholders of Operon. This fee was not paid for by the Company, but by the Operon shareholders. However, in accordance with the accounting rules for a pooling of interests transaction, this expense is reflected in the current year financial statements. The acquisition costs also include approximately $1.0 million in Netherlands capital tax, which is based on the amount of capital raised in share issuances. In-Process Research and Development. On December 31, 1999, the Company acquired Rapigene, Inc., subsequently renamed QIAGEN Genomics, Inc., in a transaction accounted for as a purchase. Independent appraisers utilizing proven valuation procedures and techniques allocated a portion of the purchase price as in-process research and development. The Company recorded a charge of $5.1 million for purchased in-process research and development in the fourth quarter of This charge represents the estimated fair value of the purchased in-process research and development based on risk-adjusted cash flows related to the in-process research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future use. Accordingly, the Company expensed these costs. Other Income (Expense). Other income increased to $2.2 million in 2000 from $1.6 million in This increase was mainly due to increased interest income on marketable securities, partially offset by an increase in foreign currency transaction losses. During 1999, the Company entered into three equity investments in new start-up companies. In that year, a total of $637,000 was recorded as the equity loss from these investments. In 2000 these losses totaled $870,000. Given the newness of the ventures, the Company anticipates that these investments will continue to generate losses at least during the next several years. The Company intends to continue to make strategic investments in complementary businesses as the opportunities arise. Accordingly, the Company may continue to record losses on equity investments in start-up companies based on the Company s ownership interest in such companies. The Company received a total of $1.2 million in 2000 for research and development grants from European and German state and federal government institutions compared to $1.1 million in The Company s research and development activities are principally carried out in Germany, and the Company expects to continue to apply for such research and development grants in the future. Interest expense increased to $1.6 million in 2000 compared to $1.3 million in This increase is primarily due to interest expense on the Company s new research and development facility, which carries higher principal and interest costs than the former facility alone. In January 2000, the Company began recording lease payments on the expansion of the research and development facility, thus lease-related interest expense in 2000 exceeded 1999 amounts.

23 Interest income increased to $3.0 million in 2000 from $1.6 million in Interest income is derived mainly from the Company s investment of funds in investment grade, interest-bearing marketable securities. As of December 31, 2000, the Company had approximately $37.3 million invested in such securities. In 2000 the Company incurred losses on foreign currency transactions of $231,000 compared with a gain of $420,000 in Income from foreign currency transactions reflects net effects from conducting business in currencies other than the U.S. dollar. QIAGEN N.V. s functional currency is the U.S. dollar and its subsidiaries functional currencies are the German mark, the British pound, the Swiss franc, the French franc, the U.S. dollar, the Australian dollar, the Canadian dollar, the Japanese yen and the euro. See Currency Fluctuations. Other miscellaneous income increased to $651,000 in 2000 from $333,000 in 1999 primarily due to increased handling fees paid to QIAGEN N.V. for stock options exercises. Provision for Income Taxes. The Company s effective tax rate increased to 45.7% in 2000 from 43.8% in The increase is due to the lack of a tax benefit associated with the acquisition costs in 2000 along with increased taxable income at foreign subsidiaries in 2000 compared to Without the acquisition costs in 2000, the Company s effective tax rate would have been 40%. The tax rate in 1998 was high due to the lack of a tax benefit for the inprocess research and development charge. The effective tax rate excluding the in-process research and development charge would have been 36.4% in Minority Interest. The Company has a 60 percent interest in its Japanese subsidiary, QIAGEN K.K and until June 30, 2000 the Company also had an interest in Rosys Instruments, Inc. (Rosys Inc.) which was 50 percent owned by QIAGEN Instruments AG. The financial position and results of operations of these subsidiaries are included in the Company s consolidated financial statements. The minority interest in income of QIAGEN K.K. and Rosys Inc. decreased to $36,000 in 2000 from $149,000 in 1999, as shown in the consolidated statements of income. This decrease is primarily due to the sale of Rosys Inc. Fiscal Year Ended December 31, 1999 compared to 1998 Net Sales. Net sales increased 31% (or $37.4 million) to $158.2 million in 1999 compared to $120.8 million in Net sales in the United States increased 29% (or $19.6 million) to $87.6 million in 1999 from $68.0 million in Outside the United States, net sales increased 34% (or $17.8 million) to $70.6 million in 1999 from $52.8 million in Net sales within and outside of the United States increased principally due to increased unit sales of consumable and instrumentation products. Outside of the United States, net sales were also affected by the Company s Japanese subsidiary that continued the strong performance it demonstrated in 1998, its first year of operation. During 1999, QIAGEN K.K. reported an increase of 90% (or $6.9 million) to $14.6 million in net sales from $7.7 million in the prior year. The Company continually introduces new products in order to extend the life of its existing product lines as well as to address new market opportunities. In 1999, the Company introduced more than 24 new products, including systems to automate RNA purification on the BioRobot 9604, hardware to isolate genomic DNA on the BioRobot 9600, and both a protocol for magnetic isolation of proteins and a kit for Ni-NTA resin isolation of proteins on the BioRobot Additionally, the product line for the fast removal of dye-terminators from sequencing reactions was extended to address the high-throughput market, and QIAGEN s enzyme portfolio now includes a one-step method for doing RT-PCR reactions. The Company also experienced significant growth in unit sales of its instrumentation products in In 1999, the German mark, as measured by the average exchange rate for the year, depreciated against the U.S. dollar by 4.2% as compared to If the same rates used for 1998 were applied to 1999, net sales in 1999 would have been higher, and the growth of net sales would have exceeded the percentage calculated in reported net sales. See Currency Fluctuations.

24 Gross Profit. Gross profit increased 36% to $112.3 million (71.0% of net sales) in 1999 from $82.7 million (68.4% of net sales) in The absolute dollar increase in gross profit is attributable to the increase in net sales. The increase in gross profit as a percentage of net sales primarily reflects improvements in inventory management and manufacturing processes offset by higher licensing fees associated with some of the Company s newer products. Also, increased sales of instrumentation products, such as the QIAGEN BioRobot, reduced the overall reported gross profit, as they carry a lower gross margin than the Company s consumable products. The Company continued its efforts to improve inventory management and manufacturing processes through substantial investments in automated and interchangeable production equipment and integrated production planning systems at its German manufacturing facility. In addition, QIAGEN had successfully implemented GMP manufacturing capacities that are principally utilized to manufacture products suitable for application in diagnostic procedures. Also during 1999, the Company evaluated the inventory management and manufacturing processes at QIAGEN Instruments AG (formerly Rosys AG), to take steps to improve cost control and efficiency. 22 Research and Development. Research and development expenses increased 33% to $17.8 million (11.3% of net sales) in 1999 from $13.4 million (11.1% of net sales) in The increased research and development expenditures reflects the Company s focus on discovering and developing new products and technologies to be used in the separation and purification of nucleic acids. These research and development costs primarily represent the personnel costs related to retaining employees for research and development efforts. At December 31, 1999, there were 213 employees dedicated to research and development activities, compared to 142 employees at December 31, 1998 (an increase of 50%). During the first quarter of 1999, construction was completed on a new research and development facility. The Company leases the facility, which carries a higher leasing cost than the former facility. Sales and Marketing. Sales and marketing expenses increased 22% to $39.9 million (25.3% of net sales) in 1999 from $32.7 million (27.1% of net sales) in The increase in sales and marketing expenses reflects the Company s planned expansion of its sales force and advertising efforts in connection with the sale of its existing products and the introduction of new products. Such efforts contributed to the Company s growth in net sales during Increased sales and marketing costs are primarily associated with personnel, commissions, advertising, publications and other promotional items. As a percentage of net sales, sales and marketing expenses decreased, reflecting the Company s increasing economies of scale in this area. General and Administrative. General and administrative expenses increased 27% to $26.1 million (16.5% of net sales) in 1999 from $20.6 million (17.0% of net sales) in The Company experienced increased general and administrative costs related to growth of the Company s administrative infrastructure to accommodate increased sales. As a percentage of net sales, general and administrative costs decreased, representing economies of scale. Other Income (Expense). Other income decreased to $1.6 million in 1999 compared to $2.9 million in The decrease was mainly attributable to losses from equity method investments and decreased research and development grant income. Interest income was $1.6 million for both 1999 and Interest income is derived primarily from the Company s investment of funds, primarily from its June 1996 public offering of stock, in investment grade marketable securities. At December 31, 1999, investments in marketable securities totaled $32.0 million. Interest expense increased to $1.3 million in 1999 compared to $1.1 million in The increase is partially due to increased interest expense on the Company s capital leases, which increased to approximately $12.2 million at December 31, 1999 from $6.3 million at December 31, These leases are primarily for the Company s new research and development facility, which carries higher principal and interest costs than the former facility. Research and development grant income decreased to $1.1 million in 1999 from $1.8 million in Research and development income came from German state and federal government grants as most of the Company s research and development activities are conducted in Germany. The Company anticipates continuing to apply for research and development grants in the future.

25 Income from foreign currency transactions decreased to $420,000 in 1999 from $575,000 in Income from foreign currency transactions reflects net effects from conducting business in currencies other than the U.S. dollar. While the increase in value of the U.S. dollar had a negative effect on net sales translated from German marks and other currencies into U.S. dollars, the Company recorded income from foreign currency transactions and liabilities denominated in currencies other than the U.S. dollar, mainly the German mark. See Currency Fluctuations. Other miscellaneous income (expense) increased to $333,000 in 1999 from expenses of $36,000 in Provision for Income Taxes. The Company s effective tax rate increased to 43.8% in 1999 from 29.2% in The increase is primarily due to the lack of a tax benefit associated with the purchased in-process research and development charge recorded in In 1998, the rate was lower due to certain realized tax benefits that reduced taxable income for several of the Company s foreign subsidiaries in Minority Interest. The Company had a 60 percent interest in its Japanese subsidiary, QIAGEN K.K. and a 50 percent interest in Rosys Instruments, Inc. (Rosys, Inc.), a subsidiary of QIAGEN Instruments AG. The financial position and results of operations of these subsidiaries are included in the Company s consolidated financial statements. The Company s minority interest in income of QIAGEN K.K. and Rosys, Inc. increased to $149,000 in 1999 from $148,000 in 1998, as shown in the consolidated statements of income. 23 Liquidity and Capital Resources To date, the Company has funded its business primarily through internally generated funds, debt, and the private and public sales of equity. For the years ended December 31, 2000 and 1999, the Company generated net cash from operating activities of approximately $38.9 million and $27.3 million, respectively. Cash provided by operating activities increased in 2000 over the prior year primarily due to increases in tax benefits on non-qualified stock option exercises as well as accounts payable and accrued liabilities, offset by increases in accounts receivable, deferred income taxes and inventories. Cash used in investing activities increased to $45.0 million in 2000 compared to $25.6 million in This increase was mainly due to purchases of property and equipment in connection with the construction of the Company s new U.S. research and manufacturing facility, expansion of the Company s production operations and the completion of a new German research and development facility. Financing activities provided $14.8 million in cash in 2000, an increase from the $4.4 million provided in This cash provided by financing is primarily due to proceeds from long-term debt and the issuance of common shares, as a result of a private placement of 616,000 shares for net proceeds of $16.3 million plus the exercise of options under the Company s stock option plan, partially offset by the repayment of a note payable related to the acquisition of Rapigene Inc. in December of As of December 31, 2000 and 1999, the Company had cash and cash equivalents of approximately $21.5 million and $12.4 million, respectively, and working capital of approximately $97.9 million and $57.3 million, respectively. As of December 31, 2000, the Company had marketable securities of approximately $37.3 million, which were purchased in part with proceeds from the Company s June 1996 initial public offering and other stock issuances and also with cash from operations. The Company has credit lines totaling approximately $10 million, of which approximately $8.6 million was available as of December 31, The Company also carries $11.3 million of long-term debt that consists primarily of a note payable due in March 2009 at an interest rate subsidized by a German government-related institution, and capital lease obligations of $12.8 million due through At December 31, 2000, the Company had three facilities under construction. The Company s new research and manufacturing facility is expected to be completed in 2002 and has to date been financed with intercompany loans. Intercompany loans will continue to fund the estimated costs to complete of $51.0 million along with bank loans. Construction on two new German facilities commenced in October 2000, with estimated completion by May The estimated cost for these facilities is approximately DM 76.4 million (approximately $36.7 million) and will be financed with bank loans.